South Africa: Land Bank Loses R41Million in 'Bungled' Rate Swap

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Business Day (Johannesburg)

8 September 2008
Posted to the web 8 September 2008

Stephan Hofstatter
Johannesburg

THE Land Bank has suffered huge losses totalling hundreds of millions of rands from speculative trading, debt write-offs, theft and fraud.

But many of these losses will not be reflected in the bank's financials to be tabled in Parliament this month, suggesting the bank hopes they will be quietly forgotten.

Documents in Business Day's possession show the bank lost at least R41m from speculative trading by betting R1,2bn on the expectation of an interest rate drop last year, despite a warning from its own risk department at the end of 2006 that the upward rate cycle was likely to continue.

"Urgent action is required to prevent further losses," reads a memo sent in September last year by the bank's head of risk to its CEO and its audit and risk committee chairmen.

Bank sources say the loss, incurred by swapping R1,2bn of the bank's funding with two commercial banks from a fixed to floating interest rate, exceeded R50m by the end of financial 2008. No effort has been made to cancel the instruments to limit losses.

The treasury says it did not regard the swaps as reckless trading because the bank's policy was to limit fixed interest rate funding to 25% of its assets.

"If these transactions had not been executed, the board limit of 25% mismatch would have been exceeded," says treasury spokeswoman Thoraya Pandy.

But the bank's head of risk at the time, Gerhard Hechter, and another senior risk official who did not want to be named, both insist the bank's treasury was warned the swaps were reckless and speculative. They say the 25% threshold was simply a monitoring limit and should not be slavishly followed, irrespective of rate realities.

"Every bit of advice, every external and internal scientific measure, including the yield curve done daily, was ignored," says Hechter.

But rather than disclose the loss to investors as an abnormal item, it is likely to be disguised in the bank's annual report to Parliament because only the net result of the bank's overall hedging portfolio would be reflected in its financials. The treasury says the portfolio would show a net profit for financial 2008.

The extent of the bank's debt write-offs are unclear but likely to be substantial. A credit committee report notes that up to R300m of the bank's largest nonperforming loan, to Ushuklela Milling, could be written off.

The loan, for R640m, has not been serviced since 2004 and is clocking up R20m in interest each year.

The Land Bank is underwritten by taxpayers with a R1,5bn government guarantee, currently under review. That guarantee and a R700m cash injection received last year are the reason it continues to enjoy a high credit rating.

The treasury approved the R700m because the bank is considered a national strategic asset and is expected to play a key role in tackling SA's food price crisis by boosting agricultural production. It is exempt from paying tax and raises money through lending, overdrafts, hedging instruments and issuing bills and bonds.

The bank has been embroiled in a series of corruption and governance scandals that culminated in President Thabo Mbeki removing it from Agriculture Minister Lulu Xingwana's jurisdiction and making it Finance Minister Trevor Manuel's responsibility.

Last year internal controls at the bank were so lax its treasury's dealing room was looted weeks after a malfunctioning security door was reported but not repaired, correspondence in Business Day's possession shows.

Bills and promissory notes worth R28m were stolen from a locked safe in the dealing room, and several personal items from locked cupboards, an internal memo shows. The theft was only discovered in November after an Mpumalanga construction company tried to cash a Land Bank bill for R1m at the Standerton branch of First National Bank . The remaining 27 bills are still in circulation.

The bank said it had introduced stringent security measures after the theft, but only referred the case to the Scorpions after it was exposed by media reports.

Meanwhile, a Business Day investigation has revealed Land Bank executives are in possession of a pile of forensic documents detailing how bank officials, farmers and property speculators colluded to defraud the bank of more than R100m, but have done little to recover the money or ensure perpetrators are brought to book.

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